Question

Palmer Products has an outstanding bonds with an annual 8 percent coupon. The bonds have a per value of $1000 and a price of $865. The bonds will mature in 11 years. What is the maturity on the bonds?

Gertrude Carter and Co. has an outstanding loan that calls for equal annual payments over the 10 year life of the loan. The original loan amount was $100,000.00 at a interest rate of 6 percent. How much of the third payment is principal?

Malko Enterprises bonds currently sell for $940. They have a 6 year maturity, an annual coupon of $75.00, and a par value of $1000.00. What is the current yield?

Lance's Inc., free cash flow was just 1.00 million. If the expected long-run growth rate for this companies 5.4%, if the weighted average cost of capital is 11.4%, Lance has 4 million in short-term investments and $3 million in debt, and 1 million shares outstanding, what is the intrinsic stock price?

Please show work

Answer 1

(1)

In order to find matuirty of the bond we have to find the yield of the bond first.

As we know that at coupon rate = Yield rate, the price is equal to Face value of the asset. Hence at 8% price will be 1000$

Since in the given case Price is less than face value, yield will be more than Coupon rate. Lets take yield as 11%

Using 11%, we have to find the price of stock bu using the following formula

= C*{(1-(1/(1+r)^n )/r} + MV/(1+r)^n

Where c= coupon amount = 1000*8% = 80

r= Yield = 11%

n = Number of years of bond = 11

MV = Maturity Value = 1000

= 80*{(1-(1/(1+0.11)^11 )/0.11} + 1000/(1+0.11)^11

= 813.8045$

By doing interpolation

for 8% - 1000$

for x - 865$

for 11% - 813.8045$

(x-0.08)/(0.11-x) = (865-1000)/(813.8045-865)

Solve for X

x-0.08 / (0.11-x) = 2.6370

x-0.08 = 0.29007 - 2.6370X

3.6370x = 0.37007

X = 10.1751% approximatley .

Years	Coupon(Face Value*Coupon Rate)	Present Value @10.1751% (a)	Weights (a/b)	Duration (Years* Weights)
1	80	72.61168812	0.084446179	0.084446179
2	80	65.90571565	0.076647245	0.15329449
3	80	59.81906588	0.069568573	0.20870572
4	80	54.29454194	0.063143644	0.252574577
5	80	49.28022933	0.057312083	0.286560413
6	80	44.72900803	0.052019088	0.31211453
7	80	40.59810976	0.047214923	0.330504459
8	80	36.84871606	0.042854441	0.342835524
9	80	33.44559347	0.038896666	0.350069993
10	80	30.35676253	0.035304407	0.353044071
11	1080	371.9681617	0.432592751	4.758520265
	b	859.8575925	Duration	7.432670221

(2)

In order find thrid year principal first we have to find yearly annuity which can be calculated using following formula

Present value of Loan amount (PVA) = 100,000$

Interest rate (r) = 6% per anum

Number of years(n) = 10 years

PVA = Annuity*{(1-(1/(1+r)^n))/r}

100000 = Annuity *{(1-(1/(1+0.06)^10))/0.06}

Annuity = 13,586.7958$

Interest = Beginning Balance * Interest rate

Principal = EMI or Annuity - Interest

Ending Balance = Beginning Balance - Principal

Years	Beginning Balance	Interest	Principal	EMI	Ending Balance
1	100000	6000	$ 7,586.80	₹ 13,586.80	₹ 92,413.20
2	₹ 92,413.20	5544.79225	$ 8,042.00	₹ 13,586.80	₹ 84,371.20
3	₹ 84,371.20	5062.27204	$ 8,524.52	₹ 13,586.80	₹ 75,846.68

Third year principal payment would be 8524.52$

(3)

Current Yield = Coupon Amount / Current Market Price

Given Coupon amount = 75$

Current Price of bond = 940$

Current Yield = 75/940 = 0.079787 or 7.9787%

(4)

Given Free cash flow of the current year(FCF) = 1,000,000$

Growth rate(g) = 5.4%

Cost of Capital(WACC) = 11.4%

Value of Company using Gordans

=FCF*(1+g)/(WACC-g)

= 1000000*(1+0.054)/(0.114-0.054)

=1054000/0.06

=17,566,667$

Value of Equity = Value of company - Net debt

Net Debt = Debt - Cash and cash equivalents (Short term investements)

Value of equity = 17566667 - (3000000-4000000) = 18,566,667$

Intrinsic Value Per Share = Value of Equity / Number of shares

Given Number of shares = 1,000,000 shares

Intrinsic Value Per Share = 18566667/1000000 = 18.5667$ per share